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OrganizationRESTRICTEDG/C/W/143
WT/COMTD/W/60
10 March 1999(99-0958)Council for Trade in GoodsOriginal: English
trade facilitation
Trade Facilitation in relation to Development
Communication from the European Communities
summary
Trade facilitation constitutes an important component of development policy. To succeed, however it requires political commitment, the setting of clear policy goals, partnership between private and public sectors, and cooperation between international organisations. The creation in WTO of basic rules on trade facilitation will underline and secure the political commitment of WTO Members, and set the international policy framework needed to guide it in a consistent direction. A framework of rules will in turn help harness private sector support. An integral part of any WTO agreement on trade facilitation should be concrete commitments on capacity building supported by WTO Members in partnership with international institutions and the private sector.
The Development benefits of simplified trade procedures
It is largely accepted that development is effectively promoted through the creation of an open market economy which allows optimal allocation of resources. Progressive trade liberalisation and rule making under the GATT and the GATS has proven the most effective way of establishing such open markets. But open markets can only function properly if, among other things, procedures designed to facilitate the flow of trade are put in place and a countrys capacity to regulate economic activity on its territory is made effective. If not, then some of the economic and welfare gains of liberalisation remain more theoretical than actual, since they do not lead to increased economic activity. More concretely, developing countries risk getting left behind in a process of rapid technology change unless both private and public sector embrace new forms of business communication and organisation. Trade facilitation strategies become, in such circumstances, an integral part of any liberalisation, and overall development policy, since they facilitate trade flows and increase a countrys regulatory capacity.
Specifically, trade facilitation supports countries development goals in several ways:
Participation in international trade
Greater trade efficiency will allow traders who would previously be excluded from international markets access to those markets. Traders may be excluded or inhibited by inter alia high overhead costs of exporting or of importing inputs, overly complicated/bureaucratic export and import procedures, inadequate trade and transport infrastructure, and inefficient or untransparent procedures in overseas markets. Problems are particularly acute for SMEs, which are generally seen as one of the most effective means of promoting growth, but which suffer from economy of scale weaknesses or may lack modern information technology. The costs of unsimplified procedures fall disproportionately on SMEs and companies in developing countries.
UNCTADs Columbus declaration makes this point forcefully: "Ensuring that no potential trader is excluded from international trade is a priority objective for the international community as a whole. In all countries, potential traders, especially SME's, are confined to the margins of international trade because of lack of efficient procedures, lack of access to information and information networks, or inadequate support services or trade logistics. Although the needs to be addressed vary considerably from one country to the next, enterprises of all countries can greatly benefit from higher awareness of efficient business practices and trade facilitation measures".
Lowering the costs of trade transactions
Numerous estimates have been made that trade facilitation measures could lower costs on export transactions by 6 to 10 %. This on its own justifies to both developing and developed countries the effort in working in this field. UNCTAD has suggested that transaction costs can account for 2-3% of the arrived cost of goods. Simplifying procedures enables increased profits where exports already take place, and allows exports where traders have been discouraged from trading due to complicated procedures.
Improving the Climate for Investment in Developing Countries
The bulk of FDI flows remain to, and between, developed countries. When asked to identify the reasons for investing in particular countries, companies frequently point to administration of trade as a key component in any successful investment rщgime. In an era of outsourcing and just-in-time production techniques, the need for an efficient cargo infrastructure, the rapid passage of inputs and finished goods through customs controls, and streamlined transaction procedures, speaks for itself. Their absence is a clear disincentive to investment. Establishment in the WTO of a framework of basic rules on trade facilitation will help improve the investment environment in developing countries, which can help both the standard of living per se and disseminate advanced industrial/manufacturing knowledge.
Similarly, the introduction of simple and transparent procedures, and the progressive improvement of transport and communications support for trade will also encourage the development of service industries - from freight forwarding and haulage to express carriers and information technology. Simplified trade procedures, and future GATS liberalisation in sectors such as transport, distribution and telecommunications will thus be mutually reinforcing.
Strengthening the Tax and Revenue Base
Trade facilitation, notably customs reform, directly improves tax returns by enabling effective collection of import duties. Customs revenue is still often the major contributor to national budgets in several countries, but as studies and national experiences have shown there is a correlation between those countries with the greatest dependence on (high) import duties as a source of revenue, and systematic tax evasion, fraud and under-collection. Developing countries with a combination of high import duties and unmodernised customs thus face the greatest haemorrhaging of revenues. Reforming customs procedures, notably through automation, harmonisation of information requirements, and risk-assessment methods, reduces levels of evasion, under declaration, fraud, and collusion with customs officials, and allows comprehensive, correct and prompt duty calculation and tax collection, with obvious benefits for the public purse.
Improved Controls and other governmental functions
Modern, simplified trade procedures enable governments to better enforce other regulations and policies more effectively, through the more efficient management of goods moving across borders. Apart from the combating of customs fraud, this helps to prevent illegal movement of restricted goods, the dumping of unsafe products on developing country markets, the proper protection of intellectual property rights and other public welfare goals. This improved regulatory capacity is a vital concomitant of trade liberalisation, since it helps prevent some negative effects of liberalisation and helps ensure its social acceptability.
The capacity to collect statistics is also part of an effective government machinery. It is a capacity which many developing countries lack, including those who rely heavily on preshipment inspection companies. As the UN Statistical Office and others have pointed out, effective customs procedures are a key to accurate statistics, gathering, and thus to the ability of countries to carry out accurate economic forecasting and make policy choices based on that information.
Reducing Corruption
Some customs authorities are at present underfunded or lack strategic management, with implications for efficiency and integrity. Simplification and automation combined with training and better pay for a smaller number of customs officials provides part of the solution to corruption and related problems, but is not in itself enough. A more radical political commitment to change, and the resources and expertise to carry out that change is essential: this is examined more closely later.
Reducing Administrative Costs
Simplification measures by customs and other agencies allow significant reductions in administrative costs. Introduction of electronic customs clearance systems, EDI-based coordination with other agencies, risk assessment techniques (rather than inspection of individual consignments), and pre-arrival processing and post-release audit all reduce time, resources and levels of error. As trade flows increase greater than public resources, trade facilitation measures of this type are necessary. Chile, at the March 1998 WTO Symposium estimated savings of US$ 1 million each month through automation and a greater use of risk assessment: experience with UNCTADs Asycuda programmes for customs automation shows that such outcomes are not unusual. This improvement in efficiency also benefits traders: more rapid release and more predictable procedures around which they can fashion their transport and logistical planning.
Some countries are concerned over the start up costs involved in introducing e.g. computerisation and associated training in use of risk assessment and so on. However, the experience of Chile and others showed that costs are recovered over time through greater operating efficiency and increased tax collection.
Overcoming Technical Constraints
The current move towards open EDI systems can permit developing countries to overcome current technical and infrastructural constraints through the use of relatively simple forms of information technology. Provided that capacity building support is given, means exist to automate customs, cargo handling and other activities at virtually any required level of sophistication and, increasingly, using internet based software that companies can use for both business transactions and interfaces with government. Developing countries can benefit from the availability of cheaper and more modern technologies, and in some cases avoid the technology-expensive learning curve that many industrialised countries have gone through. If, for example, through automation the processing time of a consignment in a port can be halved, this amounts to an effective doubling of port handling capacity without having to build new facilities. The EC has noted elsewhere that use of IT is a tool in trade facilitation policy that can work only in conjunction with prior simplification and harmonisation of procedures.
Developing a culture of cooperation between government and business
Traders will have more confidence in their dealings with customs etc if they find authorities competent and efficient, and exporting trade-friendly. Equally important, any serious initiative to facilitate trade and simplify procedures must be done in partnership with the trading community, to ensure maximum compatibility between systems and operating methods. Following such a train of thought the UNCTAD Columbus Declaration paragraph. 5 reads "Close co-operation among national and local government authorities and enterprise sectors strengthens the ability of firms to participate fully in international trade" This cooperation, combined with measures that reward compliant and efficient traders, enables the necessary cultural change: the trading community and customs see each other no longer as obstacles or opponents but partners.
From the above the advantages of simplified trade procedures for developing countries (as well as developed countries) is clear. An open trade rщgime reinforced by transparent and efficient trade administration and simplified processes for border crossing trade is key to the trade performance of SMEs and larger companies alike, and to accelerating economic development. Costs of modernisation and reform can be recouped through savings in administration, increased tax collection and improved economic performance.
how wto can act as a catalyst for development
If the benefits of trade facilitation are widely agreed, then it is also recognised that some of the reforms needed cannot be implemented overnight, or at no cost, but require time, resources, but first of all political commitment to build capacity and foster longer term change. WTO can help deliver in all these areas.
Securing Political Commitment
The EC has in several submissions to the WTO proposed that we develop a framework of rules on the simplification of trade procedures, building out from the principle of GATT Article VIII on reducing import and export formalities to the minimum. The EC believes that WTO rules are the surest way to ensure the political commitment needed to turn trade facilitation into reality. By setting a framework of rules one ensures, at the highest political level, that the importance to development of trade facilitation is recognised, and the necessary reforms begun. Given that simplifying trade procedures involves many agencies of governments and the participation of the private sector, a top down approach to the setting of overall strategy goals is needed. Experience shows that a purely bottom up approach e.g. within an individual customs or trade administration cannot work without clear political support.
Harnessing Private Sector Investment and Support
Making trade facilitation a clear national priority, and setting clear international rules are almost prerequisites for private sector support and participation. First, no trade facilitation initiative, however modest, can be really successful unless designed and implemented in cooperation with the private sector. At the most simple level, changes to customs procedures introduced without reference to commercial trading patterns and the operating methods of importers, freight forwarders, customs brokers etc are not going to be supported or used, and thus their benefits will be limited. More advanced or comprehensive policies aimed at integrating of private and public sector information, transport and communication systems need that cooperation even more.
Secondly, considerable resources are available within the private sector, from provision of IT hardware and software to training of officials, to investment in port, transport and communications infrastructure, to the sharing of information systems. But these resources will only be provided if the private sector is confident that the investment will not be wasted. The ECs consultations with the private sector suggest that a framework of WTO rules, setting the broad policies and standards for individual trade facilitation strategies, can give the private sector more confidence to invest. In the absence of a WTO framework to guide efforts, and ensure political commitment, private sector commitment will be less apparent. A WTO framework of rules will also enable developing countries, in the next phase of liberalisation in services, to increase inward investment in services sectors such as transport, distribution, banking and telecommunications, all of which have an important role to play in providing the support and technology for successfully simplifying trade procedures.
Capacity Building at the International Level
Adherence to rules on simplified procedures requires not just a political decision or the introduction of regulations (though these are needed), but for some developing countries would imply capacity building and resources. Any WTO agreement must address this squarely. It would not be sufficient to demand WTO commitments, however desirable in themselves, if the means were lacking to implement them. Nor is it enough to establish rules and then confine assistance to training officials to understand what they mean.
Several international organisations and donors have developed good tools and instruments for e.g. customs reform, harmonisation of procedures, cargo tracking, automation, longer term management change. Notable for example are the UNCTAD Asycuda (electronic customs clearance), ACIS (cargo tracking) and Trainmar (port management) programmes, the WCOs excellent Customs Reform and Modernisation Programme, and programmes carried out under World Bank or IMF auspices, as well as the major development and project financing carried out by the European Community bilaterally or through the international organisations.
These programmes have however three key limitations.
First, they are only specific tools to help implement what has to be designed as a much wider process of reform and innovation in managing trade both at enterprise and administration level. Each addresses only specific parts of what needs to be conceived of as a whole set of related trade procedures. This means that individual programmes carried out in isolation rather than in a holistic framework will have correspondingly limited results. To take a crude example, automation of customs release will not bring major benefits unless done in conjunction with broader reform and modernisation of customs, integration of other agencies, and prior rationalisation of documentary and data requirements.
Second, there is overlap and little co-ordination between different programmes. Resources are finite, and unlikely to grow significantly. If one cannot increase funding significantly, then more effective use of existing resources of different major capacity builders  such as UNCTAD, the WCO, the World Bank, the IMF and the European Community  is needed. This is clearly possible: we have come across many cases of duplication of efforts by different agencies, with wastage of resources, and little attempt to coordinate or achieve economies of scale. Even in straightforward areas like diagnosis and need assessment there seems to be a great deal of overlap, with almost every agency having developed a means to assess the particular needs of any potential beneficiary, and the same country having been assessed in the same areas by multiple agencies.
The WCO has itself recently remarked that in the area of customs reform "human, financial and technical assistance is being provided by different international donors with little co-ordination or strategic approach. This is leading to duplication, confusion and endless provision with little transfer of skills, management development or sustainability on the part of the beneficiary". The same is true for trade facilitation writ large. The Community for its part is unlikely to be able to continue its present level of funding to international organisations without an improvement in coordination, and exploitation of the synergies that can exist if only the different initiatives could be marshalled together within an overall strategic plan.
There are at least three reasons for this duplication. One is that there is a degree of rivalry between different organisations. Second, no integrated structure exists for them to work together: cooperation is often on an ad hoc basis and relies on personal contacts between individuals. Third, in the absence of internationally adopted standards and rules for trade facilitation there are no global objectives to which different organisations can work. Instead, different and possibly competing approaches and standards are developed and offered.
Finally, it needs to be borne in mind that while, deservingly, much existing cooperation and development assistance is currently focused on least developed countries, needs are also apparent in other developing countries and should not be forgotten. In some such cases, the private sector may well have an important contribution to make.
Specific Proposals
The EC believes that through a WTO agreement major advances can be made to coordinate and more effectively build capacity in developing countries. In particular a framework of WTO rules which set overall policies should include provisions that will encourage both information sharing and longer term coordination between different international organisations carrying out capacity building. The template would be that of the "Integrated Framework for Trade-Related Technical Assistance, including for Human and Institutional Capacity-Building, to Support LDCs in the Trade and TradeRelated Activities" but on a bigger scale which, while focusing on LDCs, would also provide funds for other developing countries (which could be designed to encourage private sector investment).
The main actors for cooperation in this kind of capacity building and assistance for trade facilitation would appear to be UNCTAD, WCO, the IMF and the World Bank, with WTO setting the basic trade policy framework and providing the platform for cooperation. Such an approach would serve two main objectives  both increasing the profile of and ensuring lasting commitment to implement trade facilitation measures but also making the technical assistance that is granted more effective through better co-ordination. A co-ordinated system working to achieve objectives laid down in WTO rules, with commonly agreed performance benchmarks and timeframes would also be more effective in attracting additional public and private sector finance. This is very much in the spirit of the "Partnerships for Development" approach to capacity building launched by UNCTAD last year.
Within such a coordinated approach the first element would be to identify what activities are already being carried out in individual countries or regional groups and where action is required, and then to design the specific trade facilitation strategy best suited for the country in question, with its agreement and commitment. Such a strategy would involve a rational division of labour between different organisations and the private sector, whose participation would be sought as part of any national strategy. Implementation of WTO rules to simplify trade procedures would thus be backed up by capacity building. This is a concrete example of the ECs interest, in many areas of the WTOs future work, to working with partners to help build the domestic capacity to take full advantage of progressive multilateral liberalisation.
__________
Columbus Declaration, United Nations International Symposium on Trade Efficiency, 1996. Preamble paragraph 4.
Columbus Declaration, preamble paragraph 8. reads "Adoption of Trade Efficiency measures can significantly lower the costs of trade transactions. Estimates place the costs of trade transactions at 7 to 10 % of the total value of world trade. We believe that promotion and implementation of these measures by all will contribute to greater participation in world trade, thus allowing the creation of new international trade flows. Trade efficiency measures would also result in reduction of trade transaction costs by a quarter, or by up to 100 billion dollars annually by the year 2000. We shall strive to reach these objectives through national and collective efforts".
Notably in document G/C/W/122 dated 22.9.98: "Assessment of the Scope for WTO Rules in the Field of Import, Export and Customs Procedures". Canada in document G/C/W/126 has set out a comparable framework of possible principles and WTO measures.
The UNCTAD review of technical activities for 1997 reports that Asycuda has been successful, although it registered some problems where there was significant resistance within individual customs authorities.
WCO Customs Reform and Modernisation Programme, WCO 1996, p.6.
An example of current funding is instructive. LDCs enjoyed 40% of a total UNCTAD expenditure on trade efficiency of $US 23.3 million in 1997, which was an increase of 29% on 1996. This upward trend is expected to continue. UNCTAD's general funding is channelled through three paths; trust funds, UNDP and UN Regular programme for technical funding. Contributions for 1997 to the Trust Funds. (in 000's US Dollars): Developed Countries 5991 (of which Japan, Luxembourg, the Netherlands, Norway and Switzerland = 63%); Developing Countries (general contributions): 1996; Developing Countries (self-sustained): 1092; European Commission: 3821; Multilateral 905; Foundations/misc. 464. Total: 13270. The EC is the biggest single provider of funds, and two EU Member States are also significant individual contributors to the Trust Funds.
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